Economics essay 1: economic growth will come to an end naturally

Last week I was looking for something I had written a few years ago, and I found two essays that I had written in 2008. I was trying to clarify my thinking on economics, using the device of explaining the discipline to a non-economist. They were meant to be the start of a longer series, but alas the rest of life intruded. I have decided to publish them through this blog, and to try and extend the series.

My blog posts are long enough (over 1,000 words a piece, usually), but they are not long enough to develop thinking properly. And the pressure to get two posts out a week is not conducive to deep thought either, as the rest of my life is proving quite active, even though I am now retired. These essays are longer (the first just under 2,500 words), and certainly more considered.

Both of the essays developed ideas that I have used in my blogging since. The first is that there is a natural limit to economic growth - which I am now convinced we are reaching. The second looks at trade, and especially that between developed and developing nations - and why this leads to gains that are then reversed in developed economies. A further feature of the essays is that they frame economic ideas in a historical, or evolutionary, context. One thing leads to another and society changes. This is a break from the idea of a static equilibrium that dominates much economic thought. Economists even try to give a static quality to dynamic concepts, like growth and productivity change, by treating them as constants. Sometimes they produce data series of 200 years and more, as if to suggest that nothing really changes.

I wrote the essays just after I finished my degree in Economics at UCL as a mature student. But it was before the collapse of Lehman Brothers precipitated what we now understand as the Financial Crash, though it had been clear from 2007 that the world's financial system was teetering on the brink.

I have edited the essays (a job not yet finished for the second one) so as to correct mistakes and clarify language - but I have avoided a rewrite, even though I would write differently now. Partly this is to preserve authenticity; mainly because a rewrite would take much longer. What you read is how I saw things then. I will use the covering blog post to offer any new insights.

So what of the first essay: Wealth, wellbeing and growth? This explores the idea that economic growth might come to a end simply through the freely made choices of the people. This is not a line of thinking that I can remember any modern economist trying to develop, although it was foreshadowed, as so much in modern economics is, by Maynard Keynes.

This idea follows from four observations: that consumption for personal needs will reach saturation; that productivity gains allow increased consumption of things, but cannot change human content, and so make their products less attractive; that leisure holds a compelling attraction to those who can afford it; and that the quest for status is a zero-sum game.

Increasingly we want things that economic growth cannot deliver in greater quantities: land, leisure and fame. Technology change is not necessarily leading to increased productivity, while still delivering things that we want. Wellbeing may advance without growth. Though many in our society clearly need to consume more than they do - we still have poverty - that does not imply that increased consumption for everybody, even as an average, is the way forward people will choose. Economists are quite unready for this.

So what has changed since 2008? The crash may suggest the unsustainability of ever increasing consumption, especially if it fuelled by debt. I hint at this idea without developing it. Since then growth has become a political obsession - so the idea that it might not be considered to be an outright good has even less currency. The Greens have dropped their low growth rhetoric and replaced it with something that is quite ambiguous. The left has chosen "austerity" as top of their most hated abstract nouns, on the grounds that it is an attack on growth, though also on grounds of another abstract idea: "social justice".

So we have a long way to go before my idea will get any political traction. And yet the idea of secular stagnation, is gaining ground. This is seen as a Bad Thing, of course, but its roots can be traced to as far back as the 1990s. This is the idea that there is a structural excess of savings over investment in developed economies, which undermines growth - which is only sustained, by ever increasing cycles of debt growth and asset price bubbles. I think the ideas that I am suggesting in the essay are part, even most, of the explanation for secular stagnation.

There are some twists, though. Inequality may be an important factor in the process of saturation of consumption - a growing share of income is going to a rich elite, who are unable to spend it. This may imply that a more efficient distribution of wealth would increase consumption and lead to growth. But only up to a point, surely.

There clearly is a dark side to my idea. Demand for tax-funded services is voracious (hence the anger of some against "austerity") - but what is to be taxed in a low-growth world? And the addiction of our economies to debt requires growth to feed it; it will not be broken without a lot of social stress.

But that is the way the world is heading - and it is as well that we think the implications through.

4 thoughts on “Economics essay 1: economic growth will come to an end naturally”

Matthew
I regard this as your work in progress: a mixture. May I suggest that you go back to Schumacher’s “Small is Beautiful” for confirmation and re-orientation. I found his concept of meta-economics really useful.

By coincidence, last night, before I had come across your blog post and in response to something else, I started jotting down my own thoughts on the end of growth, or rather the reasons we might be facing some years of stagnation. These are what I came up with as the possible contributory factors:-

* The failure of the eurozone to apply policies to stimulate growth outside Germany;
* The ending of China’s investment boom;
* Possible continuing political deadlock in the USA preventing its pursuing sensible policies to maintain an optimum rate of economic activity;
* A shortage of disruptive innovation to stimulate new investment and consumption – the Robert Gordon hypothesis;
* Market saturation or “peak stuff” – many people in the richer parts of the world already have all the goods they want.

It’s only the last two that are relevant to your essay as the first three are possibly transient phenomena. Robert Gordon didn’t go public on his hypothesis till some time after you first drafted your essay so it’s not surprising that you don’t mention it.

I was planning to move on to a longer-term outlook, with the possibility of investment in low-carbon technology as a driver of growth in the medium term and low or zero growth in the longer term after the transition to zero-carbon is largely complete and resource constraints kick in at an increasing rate. I was (and still am) hoping to explain how I thought a big retreat from free-market ideology might be necessary to maintain and enhance well-being.

Like you I studied economics as a mature student. In my case it was at Birkbeck – a Postgraduate Certificate in Economics followed by an MSc, which I completed in 2002 – three years of part-time study in all, which is probably about half of the time you would have put into your course. I think you ended up with a noticeably more rounded education in economics than I did.

At the time I was studying I don’t think the end of growth was talked about in polite society. Happiness, as a topic fit for economists to study, was just beginning to emerge but I heard about this only from a fellow student. It was a little later that Richard Layard (with whom I remember going canvassing in the Darlington by-election in 1982) went public on happiness.

I remember asking a Birkbeck professor whether he thought there was much work going on about the likely economic impact of taking global warming seriously. He looked blank and said, with a slightly quizzical tone, “no”. I think a lot has changed since I completed my MSc but I still have the feeling that GDP, the physical world and human well-being are largely being thought about in separate, watertight compartments, certainly in papers like the FT.

This means I very much welcome your essay and blog post. I won’t attempt a detailed critique here – you’ll just have to make do with my thanks and congratulations.

Also thanks for the reference to Robert Gordon. His name wasn’t in my consciousness, but I think I have read about him in the Economist. The idea isn’t unfamiliar. I don’t think it is that innovation itself is slowing, it is that modern innovation is less likely to lead economic growth (which might be defined as a greater volume of things you can tax). I hint at that idea when I suggest that people are using technology to advance personal wellbeing rather than produce more. Wellbeing was in my consciousness at the time because I was involved in a Lib Dem policy group on the subject – which meant reading, and even meeting, Richard Layard.

I was also interested to hear about your background. My years at UCL turned out to be very productive. There were a number of excellent lecturers – but the my chief inspiration was Wendy Carlin, who was my tutor, and who is now prominent in the movement to change the teaching of economics. Not so much her ideas (though I have borrowed plenty) but her process of thought and analysis – which shows to me that orthodox economics can be taken in a constructive direction.